Background:
This analysis delves into the recent landmark decision of the Delhi High Court, in the case of Reliance Industries Limited v Union of India delivered on February 14, 2025.
The question before the court was concerning “exploration rights” under a Production Sharing Contract (PSC) with M/s. Reliance Industries Limited7, in respect of Block Kg-DWN-98/3 situated in the Krishna-Godavari Basin off the coast of Andhra Pradesh. As is usually the case with all PSCs, the ‘contractor’ had the right to take Cost Petroleum in accordance with the provisions of Article 15 of the said PSC; the right to take its Participating Interest share of Profit Petroleum in accordance with the provisions of Article 16 of the same PSC; the right to receive its Participating Interest share of any incidental income and receipts arising from Petroleum Operations and the obligation to contribute its Participating Interest share of cost and expenses including Contract Cost. The distinguishing fact here was that the UOI, also entered another set of PSCs in respect of the Block KG-DWN-98/2 and Block KG-OS-IG, which turned out to be adjoining blocks.
Based on the Petroleum Exploration License the Contractor carried out 3D seismic survey in the Main Block and notified it to the UOI. Preliminary results qua Original Gas in Place was prepared by independent expert consultants but a subsequent Appraisal Report in 06.11.2003 which indicated “latent connectivity” between the two blocks, was neither forwarded to the UOI nor the DGH and the Contractor did not share this information. Certain disputes arose, which respect to gas sharing, as the neighbouring contractor claimed a portion of the profit petroleum, stating that there was “… …evidence of lateral continuity of gas pools… …” inter-se the Main Block and the Adjacent Block i.e., the blocks were connected and there was migration of gas inter-se them.
A single person fact finding committee based on expert reports, affirmed the position of the neigbouring Contracts and determined the presence of “latent connectivity” between the two blocks based whereon, the UOI raised a Demand Notice, to recover the amount for additional cumulative Profit Petroleum claimed to be receivable from the main Contractor, for disgorgement of unjust enrichment claimed to have been made by the Contractor due to the migration of gas, upon the Contractor
In response, the Contractor, invoking the arbitration clause in terms of Article 33 of the PSC, issued a Notice of Arbitration raising the following issues and the arbitral tribunal held as follows (by a 2:1 majority) that :
“there was no express prohibition against the Contractor from extracting the migrated gas within the contract area/ development area and there is no obligation to share this with the adjacent block’s contractor, even though it may have migrated there, especially where the UOI has not required unitization or a joint development and has not taken a view that “… …the Reservoir can be more efficiently developed together on a commercial basis… …for securing the more effective recovery of Petroleum from such Reservoir… …”. Further the terms of the PSC read together with Petroleum and Natural Gas Rules, 195923 make explicit that the Contractor as the Contractor, licensee and lessee, is permitted and required to extract all available gas within its contract area/ development area for the even if, such gas has migrated from beyond the Contract Area.
Further, since the UOI had not required “joint development” under both the concerned PSCs, notwithstanding the vast amounts of interpretive data provided by the Contractor to DGH, non-compliance by the Contractor of the terms of the Article 26.1 of the PSC, did not amount to a material non-disclosure constituting a breach by the Contractor of the PSC and 1959 PNG Rules”.
Aggrieved by the findings, UOI filed an application before the Delhi HC under Section 34 of the Act for setting aside the majority Arbitral Award which was not allowed by a single judge bench of the Delhi HC. Aggrieved thereby, the UOI preferred the present appeal under Section 37 of the Act, before a division bench of the Delhi High Court raising the following interesting issues:
a) Does this situation amount to grounds under the appellate power under Section 37 of the Arbitration Act to interfere, as is not akin to the normal appellate jurisdiction vested in the civil courts for the reason that the scope of interference of the courts with arbitral proceedings or award is very limited, confined to the ambit of Section 34 of the Act only and even that power cannot be exercised except in case of a patent illegality.
b) Did Contractor fail in its obligations under the PSC to disclose all the interpretive data despite having the technical know-how and expertise. Was the Contractor guilty of fraud as per Section 17 of the Contract Act, 1872. Even otherwise, UOI could not have known about the continuity of gas reservoirs in the Adjacent Block and the Main Block by study of seismic data. In any event, was it the duty of the Contractor to bring it to the notice of the Management Committee about the connectivity thereof.
(a) Is there ‘patent illegality” and does this allow for interference into an arbitral tribunal’s award:
The Court concluded that - “... …The interference would be so warranted when the award is in violation of "public policy of India", which has been held to mean "the fundamental policy of Indian law". (…) The ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the most basic notions of morality or justice. It is only such arbitral awards that shock the conscience of the court, that can be set aside on the said ground. An award would be set aside on the ground of patent illegality appearing on the face of the award and as such, which goes to the roots of the matter. However, an illegality with regard to a mere erroneous application of law would not be a ground for interference. Equally, reappreciation of evidence would not be permissible on the ground of patent illegality appearing on the face of the award.
“A decision which is perverse, though would not be a ground to challenge under "public policy of India", would certainly amount to a patent illegality appearing on the face of the award.
The court held that the issue of ‘patent illegality’ involves the applicability of the provisions of Article 297 of the CoI and, since it involved a vital natural resource, ‘public policy in India’, ‘public law’ and ‘Public Trust Doctrine’, can be invoked and hence warranted interference under Section 37 of the Arbitration Act.
(b) The concept of “public trust” in exploration contracts:
- As per Article 297 of the CoI45, the UOI is a depository, holding the natural resources of India as a Trustee, for and on behalf of the people of India and without the explicit and express permission of the UOI, there can be no extraction of the said resources by anyone. It is also explicit that any (in)action(s) of/ by the UOI qua the said resources have to be governed in the light of the mandate of the Constitution of Inda
- The position with respect to what is/ are ‘public policy in India’, ‘public law’ and ‘Public Trust Doctrine’, since none of them are defined in any Statute(s), will have to be culled out from the definitions given to them in various decisions rendered by the Hon’ble Supreme Court from time to time.
Relying in previous Supreme Court decisions, the court concluded that:
“248. The concept of public trust actually finds its genesis with respect to the ocean and waters, and some have even traced this concept to the Ch'in Dynasty in China (249-207 BC) and the Roman Justinian Institutes. This has been extended substantially, and the broader notion now is that the State really is acting only in a fiduciary capacity. “The message is simple: the sovereign rights of the nation- States over certain environmental resources are not proprietary, but fiduciary.” [ Peter H. Sand, Sovereignty Bounded: Public Trusteeship for Common Pool Resources. See also Turnipseed, Roady, Sagarin & Crowder: “The Silver Anniversary of the United States Exclusive Economic Zone—Twenty-five Years of Ocean Use and Abuse, and the Possibility of a Blue Water Public Trust Doctrine”, 36 Ecology LQ 1 (2009).]
A violation of Indian public policy, in turn, includes a violation of the fundamental policy of Indian law, a violation of the interest of India conflict with justice or morality, and the existence of patent illegality in the arbitral award. Additionally, the concept of the "fundamental policy of Indian law" would cover compliance with statutes and judicial precedents, adopting a judicial approach,
c) Does the contractor have a right to explore and develop migrated gas?
It was argued that, which is not prohibited, can it be said that implicit permission by the UOI of the ‘Migrated Gas’, the Contractor is not expressly prohibited and is permitted to continue its Petroleum Operations within its Contract Area in a situation where the reservoir extends beyond its Contract Area into another… …”,
The court declined to agree to this and instead held the Contractor was appointed only for a specific and limited purpose. Moreover, noted hereinabove, such explorations/ extractions will and have to be seen in light of Article 297 of the CoI, since it is the duty of the State which is being delegated, and the entity which is carrying on with such a duty, will be constrained with the same restraints as the Union and governed by the CoI. In effect, the Contractor was supposed to do all those for and on behalf of the UOI, as it was accountable to the UOI by acting in such a manner which was in the public interest of the people of this Country and the UOI. Therefore, the gas coming out of the Main Block as a result of any such extractions belongs to the UOI, albeit, in terms of the PSC. This issue has already been reflected upon, dealt and determined by the Supreme Court in previous decisions as under:-
“It is relevant to note that the Constitution envisages exploration, extraction and supply of gas to be within the domain of governmental functions. It is the duty of the Union to make sure that these resources are used for the benefit of the citizens of this country. Due to shortage of funds and technical know-how, the Government has privatised such activities through the mechanism provided under the PSC. It would have been ideal for the PSUs to handle such projects exclusively. It is commendable that private entrepreneurial efforts are available, but the nature of the profits gained from such activities can ideally belong to the State which is in a better position to distribute them for the best interests of the people. Nevertheless, even if private parties are employed for such purposes, they must be accountable to the constitutional set-up. The statutory scheme of control of natural resources is governed by a combined reading of the Oilfields (Regulation and Development) Act, 1948, the Petroleum and Natural Gas Rules, 1959 and the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act.”
Accordingly, a private entity like the Contractor was/ is always bound by the provisions of Article 297 of the CoI and that the same is final and conclusive for all extensive purposes, especially in the present scenario involving a scarce natural resource i.e., natural gas, exploration/ extraction thereof, public interest of the Country and the UOI on the one hand and the interests of a private party like the Contractor on the other hand.
Examining the relevant provisions of 1959 PNG Rules as also relevant Article(s) of the PSC, the court concluded that:
· both Rule 28 and Rule 30 of the 1959 PNG Rules are very clear as they stipulate the conditions to be followed. Also, as per Article 26.1 of the PSC, a contractor was supposed to divulge all the data available to/ by it qua the Petroleum Operations to the UOI. Also as per Article 26.3 of the PSC, a contractor like the Contractor was also supposed to keep the UOI informed of all the developments taking place in the Contract Area.
· The Contractor’s, admitted, failure to disclose the said Independent Expert 2003 Report, was in clear violation of Article 26.1 of the PSC by the Contractor as there was a clear suggestion of connectively of the reservoirs inter-se the Main Block and the Adjacent Block.
· These actions led to taking away the rights of the UOI, to use the said resources as it best deemed fit for the benefit, of the people of this Country and/ or of the Union. Since this also led to extraction thereof by the Contractor without informing the UOI, therefore, there was never any ‘explicit and express permission’ by the said UOI for the Contractor, to proceed further,’ qua extraction of the said ‘Migrated Gas’ or the gas that might migrate once the production was commenced by the Contractor.
· Since this involved with the UOI, wherein the public interest of this Country and/ or of the Union was involved, this could not thus be a case of tacit understanding and/ or deemed acceptance on the part of the UOI and express consent was required.
· In public interest, the Contractor cannot be allowed to take and/ or derive benefit of any silence by the UOI.
· The Contractor was guilty of impeding the rights conferred to the adjoining contractor through an ‘express and explicit’ license qua its block, under the NELP. In view thereof, particularly in light of the said failure to disclose the 2003 Independent Expert Report, there was concealment and suppression, which was material and not of a trivial nature, upon which the change in profit ratio set out in the PSC depended.
· The same went into the root of the matter as it was both pertinent and significant for due adjudication inter se the parties, more so, since it was against the very terms of the PSC and the doctrine of ‘public policy’, ‘public law’ and ‘Public Trust Doctrine’. Under these circumstances, the fact, admittedly, is that there was a significant breach by the Contractor of the terms of the PSC.
· In these circumstances, there was “unjust enrichment” by the Contractor in the light of the said breach as it not only did it succeed in extraction of huge amounts of ‘Migrated Gas’ belonging to the Adjacent Block, but also, was enriched from the profits thereof at the cost of causing losses to the public exchequer, moreover, since the commodity at hand was/ is a vital natural resource belonging to the UOI as a trustee, in the public interest of the people of this Country.
· Any private entity like the Contractor cannot be allowed to subsume it for its own benefit at the cost of taking the UOI for a ride by remaining silent, and that when it is against the letter and spirit of the PSC.
· It is also worthwhile to note that Rule 30 of the 1959 PNG Rules talks about ‘normal’ operations and not about a ‘special’ circumstance where the reservoir extends beyond the Contract Area into any area, be it the Contract Area held by another party like the adjoining contractor herein. As such, the actions of the Contractor qua the extraction of ‘Migrated Gas’ were against NELP and the fundamental laws of India.
· Significantly, it is trite law that mere silence of the UOI/ Government qua the ‘Migrated Gas’, in terms of PNG Rules or Article 12 of the PSC, cannot be considered as an approval by the UOI to extract the ‘Migrated Gas’.
· Contractor has extracted the ‘Migrated Gas’, however, the said extraction/ exploration of the ‘Migrated Gas’ without any ‘explicit and express permission’ cannot be said to have been in ‘most efficient manner for betterment of the Union’, which did not belong to it and which did not entitle them to reaping any profits therefrom.
All the above are volative of the provisions of the NELP and the ‘Public Trust Doctrine’ and the fundamental law of the land. Though this decision is bound to be appealed against, until then, in the context of natural resources, public assets and rights of private contractors, the court has very clearly elucidated on “public trust” in these contracts which will have significant bearing in other infrastructure sectors also where contractors are dealing with public assets. This significantly clarifies the rights and duties of the Contractors even if the UoI or respective government authority is silent in their actions, strengthens the emerging jurisprudence of “public asset” jurisprudence in India.
Prashanth Sabeshan
Partner, Dentons Link Legal
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